Life Insurance

A Will is an Essential Component of Estate Planning

Drafting a will is a fundamental and essential component of estate planning.

Drafting a will with an experienced estate planning attorney helps avoid unnecessary work and perhaps some stress, when a family member passes away. A will permits the heirs to act with the decedent’s wishes in mind and can make certain that assets and possessions are passed to the correct individuals or organizations.

The Delaware County Daily Times’ recent article, “Senior Life: Things people should know about creating wills,” says that estate planning can be complicated. That’s the reason why many people use an experienced attorney to get the job done right. Attorneys who specialize in estate planning will typically discuss the following topics with their clients.

  • Assets: Create a list of known assets and determine which of those are covered by the will and which have to be passed on according to other estate laws, such as through joint tenancy or a beneficiary designation, like life insurance policies or retirement plan proceeds. A will also can dispose of other assets, such as photographs, mementos and jewelry.
  • Guardianship: Parents with minor children should include a clause regarding whom they want to become the guardians for their underage children or dependents. (For more about this, download Mastry Law’s FREE report A Parent’s Guide to Protecting Your Children Through Estate Planning.
  • Pets: Some people use their will to instruct the guardianship of pets and to leave assets for their care. However, remember that pets don’t have the legal capacity to own property, so don’t give money directly to pets in a will.
  • Funeral instructions: Finalizing probate won’t occur until after the funeral, so wishes may go unheeded.
  • Executor: This individual is a trusted person who will carry out the terms of the will. She should be willing to serve and be capable of executing the will.

Those who die without a valid will become intestate. This results in the estate being settled based upon the laws where that person lived. A court-appointed administrator will serve in the capacity to transfer property. This administrator will be bound by the laws of the state and may make decisions that go against the decedent’s wishes.

To avoid this, a will and other estate planning documents are critical. Talk to an estate planning attorney or download a FREE copy of our estate planning book, Failing to Plan is Planning to Fail.

Reference: The Delaware County Daily Times (January 7, 2019) “Senior Life: Things people should know about creating wills”

What’s the Difference Between Per Capita And Per Stirpes Beneficiary Designations?

A will covers the distribution of most assets upon your death. However, any assets that require beneficiary designations, like 401(k), IRAs, annuities, or life insurance policies, are distributed according to the designation for that account. A beneficiary designation takes precedence over the instructions in a will or trust.

Benzinga’s recent article addresses this question: “Estate Planning: What Are Per Capita And Per Stirpes Beneficiary Designations?” Have you changed the beneficiary designations, since the account or policy was first started? If you need to update your beneficiary designation, talk to the company responsible for maintaining the account. They’ll send you a form to complete, sign and return. Keep a copy for your own records.

You should also name a contingent beneficiary to receive the account, in case the primary beneficiary passes away before you can update the beneficiary list. Without a listed contingency, your account designation goes to a default, based on the original agreement you signed and the state law.

With per capita distribution, all members of a particular group receive an equal share of the distribution. Within a will or trust, that group can be your children, all your combined descendants, or named individuals. Under per capita, the share of any beneficiary that precedes you in death is shared equally among the remaining beneficiaries. Within a beneficiary designation, per capita typically means an equal distribution among your children.

Per stirpes distribution uses a generational approach. If a named beneficiary precedes you in death, then the benefits would pass on to that person’s children in equal parts. Spouses are generally not part of a per stirpes distribution.

Assume that you had two children. With per stirpes, if one child were to precede you in death, the other child would receive half, and the children of the deceased child would get the other half.

Create a list of all your accounts that have beneficiary designations and keep it with your will. If you don’t have a copy of the latest beneficiary designation form, write down the primary beneficiary, contingent beneficiary, and the date the beneficiary designation was last updated for each one.

Remember, it’s important to keep both your will and all beneficiary designations up to date.

Reference: Benzinga (December 26, 2018) “Estate Planning: What Are Per Capita And Per Stirpes Beneficiary Designations?”

Here’s More Insight into Why Estate Planning is Critical

Fox 5 NY says in the article “Why estate planning is important regardless of your age or wealth” that this is great time to begin talking to your loved ones about estate planning, especially older relatives and parents.

The key to a successful discussion depends upon the right approach.

Try to always make suggestions, rather than demands. One great way to start the conversation with family members, is to mention what you’re doing. You might say something like, “I just took care of my own estate planning. Have you done anything? Maybe we should talk about it.” That might get the conversation rolling.

Many people believe that, as they get older, they need a will. However, that’s just one piece of the puzzle: core estate planning includes a will, power of attorney, health care surrogate and asset protection.

For most of us, the asset we most want to protect is our home. One of the best ways to do that is through a trust. Depending upon the type of trust you use, it may also have tax advantages, could protect your home during a healthcare crisis and protect your home from your children’s creditors.

You also need to find people you trust to help with finances and health care. A power of attorney is a legal document in which you grant a person the authority to handle finances on your behalf.

Similarly, a healthcare surrogate is an individual who makes healthcare decisions, if you get sick or are in an accident and can’t make decisions for yourself.

You can use one person to do both or separate individuals for each role. You can opt for a family member or a trusted friend. However, either way it should probably be a younger person, who won’t be dealing with the same aging issues as you.

You should also note that your will doesn’t cover everything. Make certain that any beneficiaries designated in your retirement plans or life insurance and any additional names on joint bank accounts are current. The beneficiaries you appointed by a designation form will get the money in those accounts, no matter what it says in your will.

If all of this sounds a bit complex, don’t worry because an experienced estate planning or elder law attorney can help you with all of the forms and all of your questions. Just understand these three things before you visit an elder law firm: your assets, whose names are on the accounts and your wishes.

Reference: Fox 5 NY (December 12, 2018) “Why estate planning is important regardless of your age or wealth”

Can Beneficiary Designations Help Simplify the Estate Planning Process?

Often overlooked, the beneficiary designation can be one of the easiest ways to move assets directly to heirs without going through the probate process.

Many accounts and financial products will allow you to designate a beneficiary.  The beneficiary is the person who will receive the asset directly when the owner passes away. This is something that most of us encounter when we open a bank account, purchase an insurance policy or start a retirement savings plan, according to the article, “A simple way to simplify estate planning,” appearing in the Tupelo (MS) Daily Journal.

MP900442211The type of assets that allow beneficiary designations also include annuities, transfer-on-death investment accounts, pay-on-death bank accounts, stock options and executive deferred compensation plans.

Remembering who the beneficiary is on these accounts can be difficult. However, when you consider the consequences of having the incorrect person named on the asset, it’s well worth the effort. Due to the importance of the beneficiary designation, note these reminders:

  • Designate beneficiaries. Without this, assets can be tied up in probate court, resulting in delays, costs and unfavorable tax treatment.
  • List a primary and contingent beneficiary. It is common to have a spouse as primary beneficiary, and a child as contingent, which lets the asset pass to the child if the spouse has also passed away. You can also name a charity you support to be the contingent.
  • Keep things up-to-date. Any time there’s a birth, adoption, death, marriage or divorce, you should review your accounts and polices.
  • Go through the instructions on the form before signing it. Beneficiary forms can vary, so review each one.
  • Coordinate your beneficiary designations with your will or trust documents. If they don’t, it could cause the probate process to be delayed.
  • Work with an estate planning attorney before naming a trust as a beneficiary. Tax consequences may be different for a trust than for an individual, so some situations make a trust a wise option.
  • Know the tax consequences of naming a beneficiary of a particular asset. That’s because every asset does not have the same tax treatment.

Far too many people learn the hard way, that whatever is on the beneficiary designation determines who receives the asset, no matter what is in your will. Make a list of all of assets that have a beneficiary designation and review it when you review your estate plan. If you don’t have a contingency beneficiary, add that as well. Your estate planning attorney will be able to help you if you run into any questions and to ensure that your beneficiary designations align with your overall estate planning goals.

Reference: Tupelo Daily Journal (November 2, 2018) “A simple way to simplify estate planning”

Do I Have All the Beneficiaries Set Up Correctly on My Assets?

The typical example is an ex-spouse getting all your retirement savings. However, what if you have a child with an opioid addition, you die, and he or she inherits hundreds of thousands of dollars—that vanish in less than a year?

The assets that you own can be passed to your family members in three basic ways: title of ownership is transferred, you name them to inherit assets in your will, or they are the designated beneficiaries named on your various banking and investment accounts and insurance policies.

Many of our assets are transferred through this beneficiary designation, yet we don’t spend enough time tracking and updating these names.

When’s the last time you’ve reviewed your beneficiaries? This question was explored in a recent InsideNoVa article, “Naming Beneficiaries: A Quick Tip to Reduce the Surprise Factor.”

For example, if your checking account is titled in your spouse’s and your name “with rights of survivorship” (WROS), you effectively co-own the account. That one should be all set, at least until the surviving spouse dies.

Your will instructs your executor on the transfer of any assets that aren’t transferred by title or contract. That’s probably at least some of your estate. Therefore, if you don’t have a will, make an appointment with an estate planning attorney to make sure you have this important document.

Next, the beneficiary designation contacts for assets like your retirement accounts, pension plans and insurance policies should be reviewed whenever there’s a major life event, like a birth or adoption of a child, a divorce, or a marriage.

Bigstock-Financial-consultant-presents--14508974Start the process by identifying all the accounts you own, including life insurance policies, annuities, investments, etc. that will pass by beneficiary designation. You should then see who the primary and secondary beneficiaries are for each. You can usually assign percentages to your beneficiaries. Therefore, you could name your spouse as primary beneficiary, 100%. Your children could then be secondary beneficiaries in equal shares.

Some contracts allow you to have your funds be distributed “per stirpes.” In that case, if you name your three children as primary beneficiaries, they each would receive a third. However, if your eldest son dies with you, with per stirpes, his share will go to his children.

In addition, there may be situations when you might designate a trust as a beneficiary. This can get complicated, so work with an experienced trust and estate attorney.

Don’t overlook this detail, as it can have a very big impact, and not always for the good, on your family and loved ones.

Reference: InsideNoVa (October 26, 2018) “Naming Beneficiaries: A Quick Tip to Reduce the Surprise Factor”

One Dozen Must-Have Documents

To make sure that your wishes are carried out, you’ll have to do your homework. Make sure that you cover these most important documents.

The last thing you want to do, is leave a bureaucratic mess for your loved ones when you die. Not only will it cause the family stress during a difficult time, it could change how your family thinks of you. That should be more than enough reason to get this done in advance!

MP900398819US News & World Report’s recent article, “12 Documents to Prepare Now for Your Heirs,” says that when people don't have their paperwork ready, it can be a huge headache for the family. A family can be left with all kinds of paperwork to sort out while dealing with grief. Even worse, heirs may forfeit life insurance proceeds and tax deductions or overlook accounts they don't know exist. That's why it's critical to have important documents ready for loved ones. Here are the documents you should start preparing right away:

A will. This is a legal document in which you name an executor to carry out your wishes, heirs to receive your assets and a guardian if you have minor children.

A letter of explanation. Your will stipulates how assets are to be divided. However, a letter of explanation can provide the reasons for these decisions. This can be helpful, if the estate is to be divided unevenly between children.

List of financial accounts and beneficiaries. Keep a list of all your finances, such as bank and retirement accounts and brokerage funds. Each may have a designated beneficiary or transfer on death provision, known as a TOD. A person who’s named as a beneficiary or TOD designee automatically will receive ownership of the asset after you die. Make sure you keep these beneficiary designations up-to-date.

Personal inventory. Most wills distribute personal property in vague terms, like designating jewelry to one person and household goods to another. To be certain that nothing significant is overlooked, create an inventory of personal items. This inventory can also list items that may be stored in another location, unbeknownst to your family.

Power of attorney. This form is an important document for your family, if you become incapacitated because of an illness or accident. A power of attorney allows a designated person to make decisions on your behalf. One form is for financial decisions, and another is for health care.

Life insurance policies. Your family can miss significant life insurance benefits, if they don't know you have a policy, or it’s been lost or misplaced. Keep records of your life insurance plans and place it with your financial records.

Real estate records. Add deeds, assessments, mortgage statements and property tax information to the documents you've prepared for your heirs. Collecting the records for them in advance will make their lives easier.

Tax returns. List the name of your CPA or tax preparer, if you have your taxes professionally done. He or she can help your family with filing final tax returns for your estate. If you file your own returns, print a copy for your files and record any login information for online tax preparation services.

Logins for accounts. Create a list of your usernames and passwords for financial accounts, email, and social media and keep it where heirs can access the information.

A digital estate plan. Some states recognize digital estate plans as legally binding. However, even if it isn’t, it can be a great resource for your family. A digital estate plan states what will happen to your digital assets, like your social media accounts, websites, digital photos, intellectual property and other files and documents. Within your plan, you can name a digital executor and list those you've named as legacy contacts on specific platforms, such as Facebook and Twitter.

An ethical will. This letter describes what you'd like remembered as your legacy, such as passing down values. An ethical will can be used to share memories or to impart wisdom.

Your final wishes. If you've made prearrangements for your funeral or cremation, place that information with your will and other end-of-life documents. Your final wishes should also include information about organ donation, pet care and who should be notified of your passing.

Distilling a lifetime into a dozen documents is not an easy task, but it is necessary. Your loved ones will appreciate your doing the heavy lifting, and it will give them the room they need to grieve their loss.

Reference: US News & World Report (October 4, 2018) “12 Documents to Prepare Now for Your Heirs”

How Does Life Insurance Work in Estate Planning?

Life insurance can be useful in paying off debt, covering funeral costs and serving as a useful resource so that estate proceeds or any one person’s savings don’t have to be tapped.

Life insurance may be the least sexy part of the transition from one farming generation to another, but this financial tool can be very valuable. If parents or grandparents have planned properly, the proceeds from the life insurance may provide the funds that permit the farm to stay in the family. The proceeds, which are not subject to estate taxes, can be used to buy out the non-farming siblings so that the family ownership of the land can continue to another generation.

Estate PlanSuccessful Farming’s recent article, “Using Life Insurance in Estate Planning,” quotes David Bau, a University of Minnesota Extension educator based in Worthington, Minnesota. He says, “Life insurance is expensive, but it’s still a very good tool in the process. The farming heirs can have insurance on their parents, and they can use that money to buy out the estate.”

Farm families typically can’t afford enough insurance to cover the increase in land values over several decades. Therefore. life insurance can be a tool to provide some fairness to the process and keep the farming business viable.

Term insurance covers death risk and increases in cost, as the covered person ages. Whole and universal life policies include a savings component with the term insurance, and these types of policies may grow in value over time.

Life insurance has many uses, including the following:

  • Paying estate taxes. Even though few families are likely to be hit by estate taxes with the federal tax reform, some states also have estate taxes;
  • Paying off debts, estate settlement costs and funeral expenses;
  • Savings in whole life policies can be borrowed to cover retirement or nursing home costs for the older generation (but it reduces the proceeds that might go to heirs); and
  • Providing an inheritance to non-farm heirs.

To get the benefits of life insurance, do some careful planning with an experienced attorney and avoid common pitfalls. For example, if you don’t want insurance proceeds to be included in a taxable estate, the heirs need to own the policy. The use of life insurance for paying estate taxes also really isn’t helpful for farmers whose spreads may not be worth as much as the nearly $22 million that a couple can now pass to a new generation tax-free. It should instead be part of an estate planning process designed to provide a fair transition to a new generation.

You don’t have to be a farmer to want to pass along your property and assets to the next generation. But you do need to sit down with an estate planning attorney to make sure that your wishes will be documented, and your will and estate plan is ready to protect your family.

Reference: Successful Farming (October 5, 2018)“Using Life Insurance in Estate Planning”

Message to Americans Living in Canada: The IRS Hasn’t Forgotten You

If you are among the one million Americans living in Canada, you’ll need to remember that you are still subject to U.S. tax law. Your income, regardless of where you earn it, needs to be reported to both the Canada Revenue Agency (CRA) as well as the Internal Revenue Service.

Americans living in other countries still need to pay taxes to the U.S., and the IRS is very good about making sure they do. A well-respected Canadian newspaper, The Globe and Mail, recently explored the responsibilities of Americans living over the northern border in the article, “Americans living in Canada: Be aware that the IRS is watching you.”

Can-USflagPrincipal place of residence. When U.S. citizens sell their principal residence in Canada, they’re not taxed on the gain by the Canada Revenue Agency (CRA). However, the IRS will tax the portion of the gain that exceeds $250,000. The problem is that if there’s no capital gains tax paid in Canada, there are no foreign tax credits available to offset tax owed in the U.S.

Foreign accounts in the aggregate of $10,000. There’s an IRS requirement that U.S. citizens file a Report of Foreign Bank and Financial Accounts (FBAR) for each year they have a financial interest in or signing authority over certain foreign financial accounts. This has a broad scope and includes accounts, such as corporate, trust and joint accounts. The penalties for not filing can be severe, so American citizens should be sure to report all applicable accounts each year.

U.S. gift and estate tax. Any U.S. citizen who makes gifts is subject to U.S. gift taxes.  However, not every gift is taxable. There is also a lifetime gift tax exemption amount of $11.18M (for 2018). Using the lifetime gift tax exemption may, however, create U.S. estate tax (or death tax) liability in the future.

Life insurance. If a U.S. citizen owns a term life insurance policy upon death, the policy’s proceeds are included when calculating the value of the policyholder’s gross estate for estate tax purposes in the U.S. If those proceeds increase their estate beyond the exemption amount in the year of death, an estate tax liability may result. Another option is having a term life insurance policy in an irrevocable life insurance trust. Income earned inside a Canadian whole life policy that’s tax-exempt by the CRA might not be tax-exempt by the IRS, which means the U.S. citizen may have to pay tax to the IRS on income earned inside a Canadian whole life policy. Therefore, U.S. citizens in Canada may want to think about owning whole life insurance policies.

Renunciation. The only way to effectively end all U.S. tax responsibilities, is to renounce an American citizenship. It’s not easy to do, and it is expensive. The renunciation fee alone is $2,350, but that’s not all you have to do. You must be able to prove that you have been tax-compliant for at least five years. If you can’t prove that, you are deemed a “covered expatriate,” which means that you are subject to U.S. exit tax. If your net worth is $2 million U.S. dollars or more on the day of your renunciation, you are also a “covered expatriate.”

Speak with a cross-border attorney about issues relating to avoiding or mitigating U.S. exit tax exposure, if you are considering renouncing your status as a U.S. citizen. There may be additional issues to consider, depending on your situation.

Reference: Globe and Mail (September 19, 2018) “Americans living in Canada: Be aware that the IRS is watching you”

How Much Life Insurance Do You Need?

Everyone’s needs are different. For most people, one large policy is enough. However, what if your life is not like everyone else’s? How do you know how much coverage you need?

Most people never really think about adding more life insurance, once they buy a policy. They figure they have that policy and insurance through their job. However, what if you wanted to have more coverage? This recent article fromNerd Wallet, “Can You Have More Than One Life Insurance Policy?”explains some life insurance basics.

Money treeFirst, you can own several policies from different companies. However, when you apply, insurance companies will inquire about your existing coverage to make certain that the amount you want is reasonable.

It’s not uncommon to purchase a lot of coverage without any problems. An insurance agent will usually ask why you need a great amount of coverage, if the total coverage would exceed 20 to 30 times your income.

A frequent need to purchase life insurance coverage is to replace income in the event that the main income-earner passes away prematurely. The answer to this is term life insurance. This policy will cover you for a certain period, like 10, 20, or 30 years. Hopefully, when the term expires, you won’t require that life insurance, because your debts are paid, and you’ve finished raising your family.

Rather than purchasing one large policy, you could get multiple policies of different lengths and amounts to match your family’s needs over time. As an example, instead of getting a single 30-year $1 million policy, you could buy three policies: a 10-year for $500,000; a 20-year, $300,000 policy, and a 30-year, $200,000 policy. This type of “laddering” strategy can save money, and it can work, if coverage needs decrease. This way, you can predict them accurately. At least, that’s the theory.

Note: if you decide to buy just a single policy and discover later that you don’t need as much life insurance coverage, most carriers will let you lower the coverage and pay less.

There are also other reasons to buy coverage, besides replacing income. These can include small-business owner needs, long-term care and estate planning.

Before you invest a lot of money into life insurance, speak with your estate planning attorney. They’ll be able to explain the role that insurance plays in estate planning and outline your general insurance needs.

Reference: Nerd Wallet (September 17, 2018)“Can You Have More Than One Life Insurance Policy?”

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